Guest post by Todd Abelson pictured to the right
Definitions and Time required recovering from a distressed sale: foreclosure, short sale and bankruptcy
Short Sale – is a sale of real estate in which the proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.
Recovery timeframe:
- Conventional: 4 years
- FHA: 3 years unless you were current at the time of the short sale, then no waiting
- VA: 2 years unless you were current at the time of the short sale, then no waiting
- USDA: 3 years
Deed-in-lieu (DIL) – is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default to avoid foreclosure proceedings. The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts his/her credit less than a foreclosure. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy.
Recovery timeframe:
- Conventional: 4 years
- FHA: 3 years unless you were current at the time of the DIL, then no waiting
- VA: 2 years unless you were current at the time of the DIL, then no waiting
- USDA: 3 years
Foreclosure – as applied to residential mortgage loans, is a where bank or other secured creditor sells or repossesses a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust”. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage or lien”. If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment.
Recovery timeframe:
- Conventional: 7 years
- FHA: 3 years
- VA: 2 years
- USDA: 3 years
Bankruptcy Time Frames
Chapter 7:
Conventional – 4 years from discharge or dismissal (5 years if its’ their 2nd BK in 7 years)
FHA & VA: 2 yrs from Discharge or Dismissal
USDA: 3 yers from discharge or dismissal
Chapter 13:
Conventional – 2 years from discharge or 4-years from dismissal (5 years if its’ their 2nd BK in 7 years)
FHA, VA & USDA – 1 year of the payout must have lapsed and payments must have been made on-time. Borrower must also receive written permission from the court to enter into a mortgage (BK payments are then counted as normal debt)
How to salvage what you already have?
“Making Homes Affordable” – a part of the Obama Administration’s strategy to help homeowners avoid foreclosure, stabilize the housing market, and improve the nation’s economy. Through this program homeowners can lower their monthly payments and get into more stable loans at today’s low rates. Additionally there is also an option for homeowners who owe more than their homes are worth. (Side note – although this was a worthy goal, in reality the results fell well short of expectations).
Fannie Mae’s “Refi Plus” – current loan must have been closed prior to June 1, 2009. Loans of up to 125% of the current value –or- those that have MI must be handled through the current Servicing Company. Loans of up to 105% AND don’t have MI may be refinance through any channel.
Freddie Mac’s “Refi Relief” – current loan must have been closed prior to June 1, 2009. Maximum loan amount up to 105% of the current value; if there is MI then they must work through current Servicing Company.
FHA Short Refinance – Even if you have negative equity through an “FHA Short Refinance”; the current lender needed to agree to “participate” (i.e., write off the loan balance to 97.75% of the home’s current appraised value).
Option – If borrower pulled equity from subject property via a cash-out refinance to pay off debt, consider opening new unsecured debt –or- acquiring new loan secured by another asset, and use the proceeds to cover the shortage when selling the property. Examples – auto loans, 401k loans, vacation/rental property loans.
This post was brought to you by:
Todd Abelson
Vice President / Licensed Mortgage Professional
NMLS#180858
AZ DFI LO-0911482
